CWS Market Review – March 30, 2012

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

— Warren Buffett

Since February 22nd, the S&P 500 has rallied 3.36% while our Buy List is up even more, 4.31%. The lesson is that investors are gradually gravitating to the kinds of high-quality stocks that we favor.

In this week’s issue of CWS Market Review, I want to take a closer look at some of the challenges ahead for Wall Street. I also want to discuss the shellacking that Joey Banks ($JOSB) took on Wednesday. (Ugh!) Finally, I’ll highlight some of the exceptional bargains on our Buy List. As well as we’ve done both in overall terms and against the broader market, I think the Buy List will do even better this spring and summer.

Expect the Market to Enter a Holding Pattern

Now let’s take a closer look at what’s been happening on Wall Street. On Monday, the S&P 500 closed at its highest point since May 2008. But like last week, Wall Street quickly gave back our gains. Actually, the stock market seems to be following the same pattern as last week—up on Monday, down on Tuesday, Wednesday and Thursday.

I think it’s very likely that the market will be in a holding pattern until we clear two important events. The first will be next week’s jobs report. The second will be the first-quarter earnings season which will start during the second week of April. The last earnings season wasn’t too hot, so investors may have grown skeptical.

The stock market has rallied almost consistently since the beginning of October, and much of the recent strength is due to the jobs market. As I’ve explained before, the stock market has become highly focused on the jobs outlook. The reason is that corporate profit margins have been stretched about as far as they can go. Historically, the stock market hasn’t done quite as well after profit margins have peaked. Since inflation is still low, many companies don’t have the market power to raise their prices. As a result, businesses need to get more customers.

The latest jobs news has been pretty good. On Thursday, the Labor Department said that jobless claims fell by 5,000 to 359,000. That’s the lowest reading since April 2008. Wall Street had been expecting a little bit better number, so that may have prompted the sell-off on Thursday. The weekly jobless claims report tends to have a lot of “noise” so economists prefer to look at the general trend which has been very favorable.

But Wall Street is waiting for the big daddy of jobs reports: the Labor Department’s March jobs report. The two big numbers to watch for are non-farm payrolls and the overall unemployment rate. You can be sure that this report will also be closely scrutinized by Governor Romney and President Obama. The March jobs report is due out next Friday, April 6th; and to make matters more dramatic, the stock market will be closed that day for Good Friday. This means we won’t know the market’s reaction until the following Monday.

I was very optimistic for the February jobs report (you might say too optimistic although the future revisions may prove me right). But I’m a bit less sanguine for the March report. My concern is that traders are already factoring in a strong jobs report into current stock prices, and I’d prefer to see the facts before we take action.

Earlier this week, the Grand Poobah of the Fed, Ben Bernanke, said that he was a bit mystified that the economy is creating jobs despite our subdued economic growth. The Bearded One suggested that one possibility is that companies “have become sufficiently confident to move their workforces into closer alignment with the expected demand for their products.” I think that, combined with the catch-up effect, may be correct. This is probably related to our theme that investors have been willing to shoulder more risk. Bottom line: There’s optimism out there, and it will help our portfolios later this spring and summer.

Don’t Give Up on Joey Banks

Now let’s talk about this week’s problem child, Jos. A. Bank Clothiers ($JOSB). The company reported Q4 earnings of $1.78 per share which hit Wall Street’s consensus on the button. On top of that, they wrapped up a very successful year. Sales rose 14.2% to nearly $1 billion. The key metric for the industry is comparable store sales, and that rose by 7.6% last year. Net income increased by 13.6% to $97.5 million and earnings-per-share rose from $3.08 to $3.49. Not many companies have numbers like that.

The first quarter of 2012 has started out more slowly than we had planned with declines in both comparable store sales and Direct Marketing sales for the first 8 weeks of the quarter. The declines are primarily due to weaker than expected traffic and also due to the warmer winter weather which is resulting in significantly lower sales of outerwear and cold weather merchandise. We are making marketing changes to address the sales trend. We believe that these changes will be effective and appealing to our customers; however we remain cautious about the outcome of the first quarter of 2012.

The stock dropped 8.55% on Wednesday. I’m disappointed, but I’ll remind you that this has happened before. JOSB often gets knocked around after earnings — good or bad — and eventually recovers. Last June, the stock dropped 13.3% after the company missed earnings by two cents per share. Yet by October, the stock had nearly made up all the lost ground. (The next two earnings reports beat by six cents and by two cents.)

I was pleased to see the stock recover a bit on Thursday. I want investors to play this one safely. I’m lowering my buy price on Jos. A. Bank from $54 to $52.

Our next Buy List earnings report will be from Bed Bath & Beyond ($BBBY) on Wednesday, April 4th. This will be for the all-important holiday quarter. The company has told us to expect earnings to range between $1.28 and $1.33 per share. That’s very doable.

As I explained last week, BBBY’s recent rally has made me slightly queasy on the price. Don’t chase it. Let’s see what the earnings report and guidance are like. For now, Bed Bath & Beyond is a very good buy up to $66 per share.

Outstanding Bargains on Our Buy List

I want to highlight some bargains on the Buy List. A few of our financial stocks have drifted lower recently. AFLAC ($AFL) is below $46 and Nicholas Financial ($NICK) is under $13.50. Both are very good buys. Reynolds American ($RAI) hasn’t done much of anything this year. At $41 per share, the stock yields more than 5.4%. I’m confident we’ll see another dividend increase near the end of the year.

CR Bard ($BCR) is one of our quieter stocks, but it’s climbed steadily all year. We already have a 15.72% YTD gain. Bard has increased its dividend every year since 1972 and it will happen again in a few months. I’m raising my buy price from $96 to $102.

Let me add a quick word on Oracle ($ORCL). If you recall, the stock initially bounced on better-than-expected earnings. Then the stock market had second thoughts and Oracle pulled back below $29 per share. The stock stabilized this week above $29 and I still believe it’s an excellent buy up to $32 per share.

One more thing: Oracle and Google ($GOOG) are about to go to court in a fight over patent issues surrounding Android. The trial will get a lot of attention, but don’t be too worried. Relative to the size of these companies, the dollar amount involved is small potatoes.

That’s all for now. Remember that the market will be closed on Friday, April 6th for Good Friday. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 seven times in the last eight years. (more)